The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2

Posted: 14 May 1998

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

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Abstract

This paper successively introduces variable velocity, durability and habit persistence in a standard two-country general equilibrium model and explores their effects on the variability of exchange rate changes, forward premiums and the foreign exchange risk premium. A new feature of the model is that agents make decisions at a weekly frequency and face conditionally heteroskedastic shocks. Nevertheless, even the most complex model fails to deliver sufficiently variable risk premiums without causing forward premiums and exchange rates to be excessively variable. Unlike previous models, the model can roughly match the persistence of forward premiums.

JEL Classification: F31, G12, C32

Suggested Citation

Bekaert, Geert, The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2. Available at SSRN: https://ssrn.com/abstract=7582

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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